HOW LARGE CHINESE CORPORATIONS ESTABLISH INTERNATIONAL COMPETITIVENESS IN OTHER BRICS- THE CASE OF BRAZIL Hans Jansson Linnaeus Baltic Business Research Center; Linnaeus University; e-mail: [email protected] Sten Söderman School of Business, Stockholm University; e-mail: [email protected] Abstract: A major feature of some large Chinese companies is the massive investments in the emerging markets of Asia, Latin-America, and Africa. One main driver behind the Government´s support of the firms, who invest in the emerging markets, is to strengthen and develop a global competitiveness: going from cost advantages in low and medium-tech industries to differentiation advantages in hi-tech industries. This has enabled Chinese firms to challenge the incumbents of many global industries, in particular Western firms. The main purpose of this paper is to describe and explain how two large Chinese firms have gained competitiveness in China for the global market (exit strategy) and transfer and adapt it to another BRICS country, the Brazilian market (entry strategy). The research is limited to the construction equipment industry which has been globalized for many years with a few major global firms dominating the industry. A theory on initial internationalization strategies is developed through an abductive research methodology. It was found that Chinese firms do not yet compete directly with major global firms such as Caterpillar, Komatsu and Volvo CE since the Chinese firms have mainly built their international competitive strength in the low- price segment, while major competitors focused on obtaining the higher-end of the market by relying on their perceived superior technologies, customer service and branding, which differentiates themselves from Chinese construction equipment firms, thereby justifying premium prices for their products and services in the high price segment. It seems as if these major firms respond to the Chinese threat by entering the low price segment to compete head on with the Chinese firms. Key words: large Chinese companies, global competitiveness, take-off and entry strategies, BRICS Proceedings of the 28th Annual Euro-Asia Management Studies Association Conference “The Changing Competitive Landscape in Euro-Asia Business Relations” School of Business, Economics and Law, University of Gothenburg Gothenburg, Sweden 23rd - 26th November, 2011 1 1 THE PROBLEM Foreign direct investment (FDI) of Chinese companies has been increasing steadily over the last ten years. Until 2004, the dominant motive for investing abroad was to seek new markets, which has increasingly been complemented by resource-seeking and asset-seeking investments (Buckley et al., 2007; Alon et al 2009; Lu, Liu & Wang, 2010). A major feature is the massive investments in the emerging markets of Asia, Latin-America, and Africa. Contrary to the investment behavior of most firms, the FDI even increased during the Great Global Recession of 2009-2010, in particular the asset-seeking investments, Chinese firms taking advantage of the opportunities to buy underpriced assets (Time 2009). The (Chinese) government has flooded the market with liquidity, produced a massive stimulus and created massive spending on an unprecedented scale, and as a result has papered over some of the problems. One main driver behind the Government support of the firms who invest in emerging markets is to strengthen and develop global competitiveness: going from cost advantages in low and medium-tech industries to differentiation advantages in hi-tech industries. This has helped Chinese firms to challenge the incumbents of many global industries, be it Western, Japanese or Korean multinational corporations (MNCs). According to Söderman et al (2008), Chinese firms prefer to trade with and invest in European markets. However, this priority now seems to have changed due to major changes taking place since 2009. Europe and the US have not yet recovered from the great global recession. EMU countries even risk a new financial crisis. Many emerging markets, on the other hand, especially the BRICS (Brazil, Russia, India, China and South Africa) have continued to grow. This new development seems to turn the world markets upside-down, creating a unique potential for the growth of the South-South trade and FDI compared to before. Even if the economic climates in the EU and the US improve, the potential for growth is much less than in the emerging markets. This article focuses on large Chinese companies and not small- and medium-sized enterprises, which work under significantly different conditions compared to larger companies with global ambitions which have stronger support from local authorities and government (Keister, 2000; Zeng and Williamson, 2003; Deng, 2004; Wu, 2005; Buckley et al., 2007). We expect further internationalization, but how will it happen and what will be the key drivers? Following Child and Rodrigues’ (2005), the essential drivers in different strategic positions of Chinese firms were examined in by looking at the impact of pricing and product positioning strategies (Söderman et al., 2008). The major question studied is how large Chinese firms become competitive in global markets, i.e. the strategic process of gradually building competitive advantages, initially at home and later in foreign markets. The main strategic drivers, both internal and external drivers, behind this development are also studied, We agree with Alon et al (2011) that existing theories can satisfactorily explain the globalization of Chinese enterprises. However, since it cannot be taken for granted that theories about Western MNCs are valid for Chinese internationalization firms, the issue is which theories that are useful for the particular problem studied and how to combine multiple theoretical approaches to offer a richer explanatory terrain (Rugman, 2010: 353). Due to the international strategic problem at hand, we apply the resource-based view together with institutional and internationalization theories to explain the developments studied, and which are all integrated from an institutional theoretical perspective. The main purpose is to describe and explain how large Chinese firms gain competitiveness in emerging markets, here represented by Brazil. Its role in the global economy is growing rapidly. E.g. Brazil is predicted to advance in the global economy ranking from no. 15 in 2005 to no. 4 in 2015 (Minevich & Richter, 2005). Brazil has invested approx. 650 billion USD in 2 infrastructure recently and domestic investments of almost 960 billion USD will occur in 2011-2014, inter alia in infrastructure for the World Cup and the Olympic Games. The research will therefore be limited to the construction equipment industry. Moreover, this industry is highly globalized since many years with a few major dominating global firms. It has also been intensively studied as a global industry since many years. The structure of the article is as follows: after the problem discussion we describe our theoretical framework on initial internationalization strategies, followed by the methodology on how we collected and analyzed data in the construction equipment (CE) material industry in China and Brazil. The conclusions and limitations finalize the paper. 2 METHODOLOGY Judging from our and others’ previous research experience from emerging markets (Jansson, 2007a,b; Söderman et al. 2008; Cardozo & Fornes, 2008; Child & Rodriguez, 2005), one cannot assume that the internationalization of Chinese firms occurs in the same way as that of firms in mature economies. Moreover, this study is also exploratory in the way that the information on the international business strategy (IBS) of Chinese firms is barren. This knowledge gap combined with a lack of the validity of theory makes the purpose of this research to gain a better understanding of the IBS of Chinese firms. Our main concern is to study the validity of theory and develop theoretical models, rather than the confirmation of existing theory. This claim necessitated a holistic approach, mainly to deal with the boundary between firms and environment, which implied in-depth case studies (Merriam, 1998; Scholz & Tietje, 2002; Yin, 2003). The methodological approach behind this research is mainly abductive (Alvesson & Skoldberg, 2008; Dubois & Gadde 2002; Josephson & Josephson, 1996), where theory and method are interrelated (Van Maanen et al. 2007). It rests on the limited possibilities of generalization of various theories in time and space. Extant theory is developed in parallel with the empirical fieldwork and the case analysis, where the final aim is to create a solid theoretical and empirical base at the same time as strengthening the practical validation of the research, by making the results relevant for organizations and society. Thus, the abductive approach requires a careful, theory-led selection of cases. An embedded case study method is used to integrate qualitative and quantitative knowledge (Yin, 2006; Scholz & Tietje, 2002). Secondary data from various public sources is the main source of information. The problems with secondary data are mainly due to the fragmentation of statistics over a large number of sources, making it hard to build a true picture of the firms and the strategies studied. There might also be distortions of data through wishful thinking and misreporting. In order to select case interviews we asked one of the incumbents, based on its experience from doing business in China and their perception of the competition from Chinese